BUSINESS
Overview
We are the largest global commercial real estate services firm, based on 2003
revenue, offering a full range of services to occupiers, owners, lenders and
investors in office, retail, industrial, multi-family and other commercial real
estate assets. As of December 31, 2003, we operated in 48 countries with over
13,500 employees in 220 offices providing commercial real estate services under
the "CB Richard Ellis" brand name. Our business is focused on several service
competencies, including strategic advice and execution assistance for property
leasing and sales, forecasting, valuations, origination and servicing of
commercial mortgage loans, facilities and project management and real estate
investment management. We generate revenues both on a per project or transaction
basis and from annual management fees. For the year ended December 31, 2003,
approximately 87.3% of our revenue related to engagements on a per project or
transaction basis and approximately 12.7% of our revenue related to ongoing
management fee engagements.
We have a well-balanced, highly diversified base of clients that includes more
than 60% of the Fortune 100. Many of our clients are consolidating their
commercial real estate-related expenditures with fewer providers and, as a
result, awarding their business to those providers that have a strong presence
in important markets and the ability to provide a complete range of services
worldwide. As a result of this trend and our ability to deliver comprehensive
solutions for our clients' needs across a wide range of markets, we believe we
are well positioned to capture a growing percentage of our clients' commercial
real estate services expenditures.
Our History
We trace our roots to a San Francisco-based firm formed in 1906 that grew to
become one of the largest commercial real estate services firms in the western
United States during the 1940s. In the 1960s and 70s, the company expanded both
its service portfolio and geographic coverage to become a full-service provider
with a growing presence throughout the United States.
In 1989, employees and third-party investors acquired the company's operations
to form CB Commercial. Throughout the 1990s, CB Commercial moved aggressively to
accelerate growth and cultivate global capabilities to meet client demands. The
company acquired leading firms in investment management (Westmark Realty
Advisors-now CB Richard Ellis Investors, in 1995), mortgage banking (L.J. Melody
& Company, in 1996) and property and corporate facilities management, as well as
capital markets and investment management (Koll Real Estate Services, in 1997).
In 1996, CB Commercial became a public company.
In 1998, the company, then known as CB Commercial Real Estate Services Group,
achieved significant global expansion with the acquisition of REI Limited. REI
Limited, which traces its roots to London in 1773, was the holding company for
all "Richard Ellis" operations outside of the United Kingdom. Following the REI
Limited acquisition, the company changed its name to CB Richard Ellis Services,
Inc. and, later in 1998, acquired the London-based firm of Hillier Parker May &
Rowden, one of the top property services firms operating in the United Kingdom.
With these acquisitions, we believe we became the first real estate services
firm with a platform to deliver integrated real estate services across the
world's major business capitals through one commonly-owned, commonly-managed
company.
CB Richard Ellis Group, Inc., which was initially known as Blum CB Holding Corp.
and later as CBRE Holding, Inc., was formed by an affiliate of Blum Capital
Partners, L.P. as a Delaware corporation on February 20, 2001 for the purpose of
acquiring all of the outstanding stock of CB Richard Ellis Services in a "going
private" transaction. This transaction, which involved members of our senior
management team and affiliates of Blum Capital Partners and Freeman Spogli &
Co., was completed in July 2001.
In July 2003, our global position was further solidified as CB Richard Ellis
Services and Insignia Financial Group, Inc. were brought together to form a
premier, worldwide, full-service real estate company. As a result of the
Insignia acquisition, we now operate globally under the "CB Richard Ellis" brand
name, which we believe is
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a well-recognized brand in virtually all of the world's key business centers.
Lastly, in order to enhance our financing flexibility and to provide liquidity
for some of our stockholders, in February 2004 we filed a registration
statement, which included this prospectus, with the Securities and Exchange
Commission, or SEC, for an initial public offering of our common stock.
Our Corporate Structure
We are a holding company and conduct all of our operations through our indirect
subsidiaries. Our directly-owned subsidiary CB Richard Ellis Services is also
generally a holding company and is the primary obligor or issuer with respect to
most of our long-term indebtedness, including our senior secured credit
facilities, our 9Ύ% senior notes due 2010 and our 11Ό% senior subordinated notes
due 2011.
In our Americas segment described below, substantially all of our advisory
services and outsourcing services operations, other than mortgage loan
origination and servicing, are conducted through our indirect wholly owned
subsidiaries CB Richard Ellis Real Estate Services, Inc., which we acquired in
connection with the Insignia acquisition and was formerly known as Insignia/ESG,
Inc. and CB Richard Ellis Inc. Our mortgage loan origination and servicing
operations are conducted exclusively through our indirect wholly owned
subsidiary, L.J. Melody & Company, and its subsidiaries. Our investment
management business in our Americas segment is conducted almost entirely through
our indirect wholly owned subsidiary CB Richard Ellis Investors, L.L.C. Our
operations in Canada are primarily conducted through our indirect wholly owned
subsidiary CB Richard Ellis Limited.
Our operations outside the Americas segment, including both our Europe, Middle
East and Africa, and Asia-Pacific segments described below, are conducted
through a number of indirect wholly owned subsidiaries. The most significant of
such subsidiaries in Europe, Middle East and Africa include CB Richard Ellis
Ltd. and Insignia Richard Ellis Europe Limited (the United Kingdom), CB Richard
Ellis SA and Insignia France SARL (France), CB Richard Ellis SA (Spain) and CB
Richard Ellis, B.V. (The Netherlands). The most significant of such subsidiaries
in Asia Pacific include CB Richard Ellis Pty Ltd. (Australia), CB Richard Ellis
(Agency) Ltd. (New Zealand), CB Richard Ellis Ltd. (Hong Kong) and CB Richard
Ellis Pte Ltd. (Singapore).
Industry Overview
Our business covers all the various segments that compose the commercial real
estate services industry, which includes leasing, sales, property management,
facilities management, consulting, mortgage origination and servicing, valuation
and appraisal services and investment management. Based upon our experience in
these various segments and our management's ongoing, internally-generated
assessment of the size of the addressable market within each such segment, we
believe that the U.S. commercial real estate services industry, excluding
investment management, generated approximately $22 billion in revenues during
2003.
In addition, we review on a quarterly basis various internally-generated
statistics and estimates regarding both office and industrial space within the
U.S. commercial real estate services industry, including the total available
"stock" of rentable space and the average rent per square foot of space. Our
management believes that changes in the addressable commercial rental market
represented by the product of available stock and rent per square foot provide a
reliable estimate of changes in the overall commercial real estate services
industry because nearly all segments within the industry are affected by changes
in these two measurements. We estimate that the product of available stock and
rent per square foot grew at a compound annual growth rate of approximately 4.8%
from 1993 through 2003.
During the next few years, we believe the key drivers of revenue growth for the
largest commercial real estate services companies will be: (1) the continued
outsourcing of commercial real estate services, (2) the consolidation of
clients' activities with fewer providers and (3) the increasing institutional
ownership of commercial real estate.
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Outsourcing
Motivated by reduced costs, lower overhead, improved execution across markets,
increased operational efficiency and a desire to focus on their core
competencies, property owners and occupiers have increasingly contracted out for
commercial real estate services, including the following:
Transaction management - oversight of purchase and sale of
properties, execution of lease transactions, renewal of leases,
expansions and relocation of offices and disposition of surplus
space;
Facilities management - oversight of all the operations associated
with the functioning of occupied real estate, whether owned and
leased, including engineering services, janitorial services, security
services, landscaping and capital improvements and directing and
monitoring of various subcontractors;
Project management - oversight of the design and construction of
interior space (as distinct from building design and construction),
including assembling and coordinating contracting teams, and creating
and managing budgets;
Lease administration - analysis of all real estate leases of a client
to ensure that it is in compliance with all terms and maintenance of
reports on all lease data, including critical dates such as renewal
options, expansion options and termination options, performance of
required services and proper charging or payment for costs;
Property Management - oversight of the daily operation of a single
property or portfolio of properties, including tenant service/relations
and bidding, awarding and administering subcontracts for maintenance,
landscaping, security, parking, capital and tenant improvements to
implement the owner's specific property value enhancement objectives
through maximization of cash flow; and
Property Accounting - performance of all of the accounting and
financial reporting associated with a property or portfolio, including
operating budget and expenses, rent collection and other accounts
receivable, accounts payable, capital and tenant improvements and
tenant lease administration.
According to an Ernst & Young study of major corporations published in the Fall
of 2002, 57% of the subject corporations retained third-party service providers
for transaction management services, 46% outsourced their lease administration
functions and 37% outsourced their facilities management functions. We believe
this represents an increase from historical outsourcing of these functions, and
we expect this outsourcing trend to continue.
Consolidation
Despite recent consolidation, the commercial real estate services industry
remains highly fragmented. Other than the limited number of national and
international real estate services firms with whom we compete in a number of
service competencies, most firms within the industry are local or regional firms
that are substantially smaller than us on an overall basis, although in some
cases have a larger local presence in certain competencies. We believe that
major property owners and corporate users are motivated to consolidate their
service provider relationships on a regional, national and global basis to
obtain more consistent execution across markets, to achieve economies of scale
and enhanced purchasing power and to benefit from streamlined management
oversight and the efficiency of "single point of contact" service delivery. As a
result, we believe large owners and occupiers are awarding a disproportionate
share of this business to the larger real estate services providers,
particularly those that provide a full suite of services across geographical
boundaries.
Institutional Ownership of Commercial Real Estate
Institutional owners, such as real estate investment trusts, or REITs, pension
funds, foreign institutions and other financial entities, increasingly are
acquiring more real estate assets and financing them in the capital markets.
Total U.S. real estate assets held by institutional owners increased to $423
billion in 2003 from $223 billion in 1994. REITs were the main drivers of this
growth, with a portfolio increase of more than 400% over
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this time period. Pension fund assets also grew by 48% and foreign institutions
augmented their U.S. real estate investments by 77%. We believe it is likely
that these owners will outsource management of their portfolios and consolidate
their use of commercial real estate services vendors.
Our Regions of Operation and Principal Services
We have organized our business into, and report our results of operations
through, three geographically organized segments: (1) the Americas, (2) Europe,
Middle East and Africa, or EMEA, and (3) Asia Pacific. Within our Americas
segment, we organize our services into the following business areas in order to
maximize synergies and cross-selling opportunities among our clients: (a)
advisory services, (b) outsourcing services and (c) investment management
services.
Information regarding revenue and operating income or loss, attributable to each
of our segments, is included in "Segment Operations" within the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of this prospectus and within note 21 to our audited consolidated
financial statements included elsewhere in this prospectus. Information
concerning the identifiable assets of each of our business segments is set forth
in note 21 to our audited consolidated financial statements included elsewhere
in this prospectus.
The Americas
The Americas is our largest segment of operations and provides a comprehensive
range of services throughout the United States and in the largest metropolitan
regions in Canada, Mexico and other selected parts of Latin America. Our
Americas segment accounted for 73.5% of our 2003 revenue, 76.6% of our 2002
revenue and 79.3% of our 2001 revenue.
Advisory Services
Corporations, institutions and other users of real estate services have been
increasingly consolidating their relationships with fewer service providers that
have depth of resources, full array of services and broad geographic reach. We
believe our advisory services businesses have been at the vanguard of this
trend, offering occupier/tenant and investor/owner services that meet the full
spectrum of marketplace needs, including (1) real estate services, (2) mortgage
loan origination and servicing and (3) valuation. Our advisory services business
line accounted for 59.7% of our 2003 revenue, 60.5% of our 2002 revenue and
61.3% of our 2001 revenue.
Within advisory services, our major service lines are the following:
Real Estate Services. We provide strategic advice and execution
assistance to owners, investors and occupiers of real estate in
connection with leasing, disposition and acquisition of property.
These businesses are built upon strong client relationships that
frequently lead to recurring revenue opportunities over many years.
Our real estate services professionals are particularly adept at
aligning real estate strategies with client business objectives,
serving as an advisor as well as transaction executor. During 2003, on
a pro forma basis, we advised on nearly 23,000 lease transactions
involving aggregate rents of approximately $27.3 billion and more than
4,700 real estate sales transactions with an aggregate value of
approximately $27.6 billion. We believe we are a market leader for the
provision of sales and leasing real estate services in many of the top
U.S. metropolitan statistical areas (as defined by the U.S. Census
Bureau), including New York, Philadelphia, Washington, D.C., Los
Angeles, Atlanta, Chicago, Boston and Dallas.
Our advice and execution assistance professionals are compensated primarily
through commission-based programs, which are payable upon completion of the
assignment. Therefore, as compensation is one of our largest expenses, this
flexible cost structure permits us to mitigate the negative effect on our
operating margins during difficult market conditions. Due to the low barriers to
entry and significant competition for quality employees, we strive to retain top
professionals through an attractive compensation program tied to productivity.
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We further strengthen our relationships with our real estate services clients by
offering proprietary research to clients through our Torto Wheaton Research
unit, a leading provider of commercial real estate market information,
forecasting and consulting services. Torto Wheaton Research provides data and
analysis to its clients in various formats, including TWR Outlook reports for
office, industrial, hotel, retail and multi-housing sectors covering 56 U.S.
metropolitan areas and TWR Select office and industrial database coverage of
over 210,000 commercial properties.
Mortgage Loan Origination and Servicing. Our wholly owned
subsidiary, L.J. Melody & Company, originates and services commercial
mortgage loans primarily through relationships established with
investment banking firms, national banks, credit companies, insurance
companies, pension funds and government agencies. During 2003, L.J.
Melody originated $11.0 billion in mortgage loans and, through a joint
venture with GE Capital Real Estate, serviced approximately $61.0
billion in mortgage loans, $23.2 billion of which relates to servicing
rights of L.J. Melody. Approximately $1.4 billion in loans were
originated for federal government sponsored entities using a revolving
credit line dedicated exclusively for this purpose. These loan
originations generally occur without principal risk because L.J. Melody
obtains a legally binding purchase commitment from the government
sponsored entity before it actually originates the loan.
Valuation. We provide valuation services that include market value
appraisals, litigation support, discounted cash flow analyses and
feasibility and fairness opinions. Our valuation business has developed
proprietary technology for preparing and delivering valuation reports
to its clients, which we believe provides it with a competitive
advantage over its rivals. We believe that our valuation business is
one of the largest in our industry. During 2003, on a pro forma basis,
we completed over 11,500 valuation, appraisal and advisory assignments.
Outsourcing Services
Outsourcing is a long-term trend in commercial real estate, with corporations,
institutions and others seeking to achieve improved efficiency, better execution
and lower costs by relying on the expertise of third-party real estate
specialists. Our outsourcing services business includes two business lines that
seek to capitalize on this trend: (1) asset services and (2) corporate services.
Although our management agreements with our outsourcing clients generally may be
terminated on relatively short notice ranging between 30 days to a year, we have
developed long-term relationships with many of these clients and we continue to
work closely with them to implement their specific goals and objectives and to
preserve and expand upon these relationships. As of December 31, 2003, we
managed approximately 422.8 million square feet of commercial space for property
owners and occupiers, which we believe represents one of the largest portfolios
in the Americas. Our outsourcing services business line accounted for 11.2% of
our 2003 revenue, 13.1% of our 2002 revenue and 14.7% of our 2001 revenue.
Asset Services. We provide property management, construction
management, marketing, leasing, accounting and financial services on a
contractual basis for income-producing office, industrial and retail
properties owned by local, regional and institutional investors. We
believe our contractual relationships with these clients put us in an
advantageous position to provide other services for them, including
refinancing, disposition and appraisal.
Corporate Services. We provide a comprehensive set of portfolio
management, transaction management, project management, strategic
consulting, facilities management and other corporate real estate
services to leading global companies and public sector institutions with
large, geographically-diverse real estate portfolios. Corporate
facilities under management in the Americas region include headquarters
buildings, regional offices, administrative offices and manufacturing and
distribution facilities. Corporate services' clients are typically
companies or public sector institutions with large, distributed real
estate portfolios. We enter into long-term, contractual relationships
with these organizations with the goal of ensuring that our clients' real
estate strategies support their overall business strategies.
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Investment Management Services
Our wholly owned subsidiary, CB Richard Ellis Investors, L.L.C., provides
investment management services to clients that include pension plans, investment
funds, insurance companies and other organizations seeking to generate returns
and diversification through investment in real estate and sponsors funds and
investment programs that span the risk/return spectrum. In higher yield
strategies, CBRE Investors "co-invests" with its clients/partners. Our
investment management services business line accounted for 2.6% of our 2003
revenue, 3.0% of our 2002 revenue and 3.3% of our 2001 revenue.
CBRE Investors is organized into three general client-focused groups according
to investment strategy, which include managed accounts group (low risk),
strategic partners (value added funds) and special situations (higher yield and
highly focused strategies). Operationally, a dedicated investment team with the
requisite skill sets executes each investment strategy, with the team's
compensation being driven largely by the investment performance of its
particular strategy/fund. This organizational structure is designed to align the
interests of team members with those of the firm and its investor
clients/partners and to enhance accountability and performance. Dedicated teams
share resources such as accounting, financial controls, information technology,
investor services and research. In addition to the research provided by our
advisory services group, which focuses primarily on market conditions and
forecasts, CBRE Investors has an in-house team of research professionals who
focus on investment strategy and underwriting.
CBRE Investors closed over $1.2 billion of new acquisitions in the Americas in
each of 2002 and 2003, and it has increased its assets under management in the
Americas from $3.5 billion in 1998 to $5.7 billion in 2003, representing a 10.2%
compound annual growth rate.
Europe, Middle East and Africa
Our EMEA segment has offices in 28 countries, with its largest operations
located in the United Kingdom, France, Spain, The Netherlands and Germany.
Operations within the EMEA countries generally include brokerage, investment
properties, corporate services, valuation/appraisal services, asset management
services, facilities management and other services similar to our Americas
segment. The EMEA segment accounted for 19.2% of our 2003 revenue, 15.6% of our
2002 revenue and 13.8% of our 2001 revenue.
We are one of the leading commercial real estate services companies in the
United Kingdom. We hold the leading market position in London in terms of 2003
leased square footage and provide a broad range of commercial property real
estate services to investment, commercial and corporate clients located in
London. We also have eight regional offices in Birmingham, Bristol, Jersey,
Leeds, Liverpool, Manchester, Edinburgh and Glasgow. In France, we believe we
are a market leader in Paris and we provide a complete range of services to the
commercial property sector, as well as some services to the residential property
market. In Spain, we provide expansive coverage operating through our offices in
Madrid, Barcelona, Valencia, Malaga, Marbella and Palma de Mallorca. Our
business in The Netherlands is based in Amsterdam, while our German operations
are located in Frankfurt, Munich, Berlin and Hamburg. Our operations in these
countries generally provide a full range of services to the commercial property
sector, along with some residential property services.
We also have affiliated offices that provide commercial real estate services
under our brand name in the Middle East and Africa, including the countries of
Bostwana, Israel, Kenya, South Africa, Uganda and Zimbabwe. Our agreements with
these independent offices include licenses to use the "CB Richard Ellis" name in
the relevant territory in return for payments to us of annual royalty fees. In
addition, these agreements also include business cross-referral arrangements
between us and the affiliates. We do not have any ownership interests with
respect to these affiliated offices.
Asia Pacific
Our Asia Pacific segment has offices in 11 countries. We believe that we are one
of only a few companies that can provide a full range of real estate services to
large corporations throughout the region, including the
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similar broad range of services provided by our Americas and EMEA segments. Our
principal operations in Asia are located in China (including Hong Kong),
Singapore, South Korea and Japan. In addition, we have agreements with
affiliated offices in India, the Philippines, Thailand and other countries
within the region that include licensing, royalty and cross-referral
arrangements on terms similar to those with our affiliated offices in our EMEA
segment, as described above. The Pacific region includes Australia and New
Zealand, with principal offices located in Brisbane, Melbourne, Sydney, Perth,
Auckland and Wellington. The Asia Pacific segment accounted for 7.3% of our 2003
revenue, 7.8% of our 2002 revenue and 6.9% of our 2001 revenue.
Our Competitive Position
We believe we possess several competitive strengths that position us to
capitalize on the positive outsourcing, consolidation and globalization trends
in the commercial real estate services industry. Our strengths include the
following:
Global Brand and Market Leading Positions. For nearly a century, we
and our predecessors have built the CB Richard Ellis brand into the
largest commercial real estate services provider in the world, based on
2003 revenue, and one of only two commercial real estate services
companies with a global brand. As a result of our global brand
recognition and geographic reach, large corporations, institutional
owners and users of real estate recognize us as a leading provider of
world-class, comprehensive real estate services. Operating under the
global CB Richard Ellis brand name, we are a leader in many of the
local markets in which we operate, including New York, Los Angeles,
Chicago, London and Paris.
Full Service Capabilities. We provide a full range of commercial real
estate services to meet the needs of our clients, and we believe this
suite of services represents a broader range globally than those of many
of our competitors. When combined with our extensive global reach and
localized knowledge, this full range of real estate services enables us
to provide world-class service to our multi-regional and multi-national
clients, as well as to maximize our revenue per client.
Strong Client Relationships and Client-tailored Service. We have
forged long-term relationships with many of our clients. Our clients
include more than 60% of the Fortune 100, with nearly half of these
clients purchasing more than one service from us. In order to better
satisfy the needs of our largest clients and to capture cross-selling
opportunities, we have organized fully integrated client coverage
teams comprised of senior management, a global relationship manager
and regional and product specialists. We believe that this
client-tailored approach contributed significantly to our 38.6%
increase in revenues from the 50 largest clients of our U.S.
investment sales group within our real estate services line of
business during the period from 1999 to 2003.
Attractive Business Model. Our business model features a
diversified client base, recurring revenue streams, a variable cost
structure, low capital requirements and strong cash flow generation.
Diversified Client Base. Our global operations, multiple service
lines and extensive client relationships provide us with a
diversified revenue base. For 2003, on a pro forma basis, we estimate
that corporations accounted for approximately 25% of our global
revenues, insurance companies and banks accounted for approximately
23% of our revenue, pension funds and their advisors accounted for
approximately 14% of our revenue, individuals and partnerships
accounted for approximately 11% of our revenue, REITs accounted for
approximately 10% of our revenue and other types of clients accounted
for the remainder of our revenues.
Recurring Revenue Streams. Our years of strong local market presence
have allowed us to develop significant repeat client relationships,
which along with the turnover of leases and properties for which we
have previously acted as transaction manager we estimate accounted for
approximately 65% of our 2003 revenue. This includes our contractual,
annual fee-for-services businesses, which generally involve facilities
management, property management, mortgage loan servicing provided by
L.J. Melody & Company and asset management provided by CBRE Investors.
Our contractual, fee-for-service business represented 12.7% of our 2003
revenue.
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Variable Cost Structure. Compensation is one of our largest expenses,
and our sales and leasing professionals are generally paid on a commission
and bonus basis, which correlates with our revenue performance. This
flexible cost structure mitigates the negative effect on our operating
margins during difficult market conditions. However, our cost structure
also includes significant other operating expenses that may not correlate
to our revenue performance, including office lease and information
technology maintenance expenses along with insurance premiums.
Low Capital Requirements. Our business model is structured to provide
value-added services with low capital intensity. During 2003, our net
capital expenditures were 1.7% of our revenue.
Strong Cash Flow Generation. Our strong brand name, full-service
capabilities, and global presence enable us to generate significant
revenues which, when combined with our flexible cost structure and low
capital requirements, have allowed us historically to generate
significant cash flow in a variety of economic conditions.
Strong Management Team and Workforce. Our most important asset is
our people. We have recruited a talented and motivated workforce of
over 13,500 employees worldwide, who are supported by a strong and deep
senior management team consisting of a number of highly-respected
executives, most of whom have over 20 years of broad experience in the
real estate industry. In addition, we use equity compensation to align
the interests of our senior management team with the interests of our
stockholders. Our senior management team beneficially owned
approximately 3.9% of our common stock as of April 30, 2004, and our
employees, as a group, beneficially owned 10.2% of our common stock on
the same date. After giving effect to the offering, our senior
management team will beneficially own approximately 3.4% and our
employees as a group will beneficially own approximately 9.1% of our
outstanding common stock.
Although we believe these strengths will create significant opportunities for
our business, you should also be aware of the risks that may impact our
competitive position, which include the following:
Significant Leverage. We are highly leveraged and have significant
debt service obligations. For the year ended December 31, 2003, on a
pro forma basis, our interest expense was $63.3 million. In addition,
the instruments governing our indebtedness impose significant
operating and financial restrictions on the conduct of our business.
Geographic Concentration. During 2003, approximately 23.8% of our
revenue was generated from transactions originating in California and
approximately 6.9% of our revenue was generated from transactions
originating in the greater New York metropolitan area. In addition, a
significant portion of our European operations is concentrated in London
and Paris. As a result, future adverse economic effects in these regions
may affect us more than our competitors.
Exposure to Risks of International Operations. We conduct a
significant portion of our business and employ a substantial number of
people outside of the United States. During 2003, we generated
approximately 30.2% of our revenue from operations outside the United
States. Because a significant portion of our revenues are derived from
operations outside the United States, we are exposed to adverse changes
in exchange rates and social, political and economic risks of doing
business in foreign countries.
Smaller Presence in Some Markets than our Local Competitors. Although
we are the largest commercial real estate services firm in the world
in terms of 2003 revenue, our relative competitive position varies
significantly across service categories and geographic areas.
Depending on the service, we face competition from other real estate
service providers, institutional lenders, insurance companies,
investment banking firms, investment managers and accounting firms,
some of which may have greater financial resources than we do. Many
of our competitors are local or regional firms. Although
substantially smaller than we are, some of these competitors are
larger on a local or regional basis.
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Our Growth Strategy
We believe we have built the premier integrated global services platform in our
industry. In developing this integrated global platform, we acquired such
entities as The Koll Company, Westmark Realty Advisors, L.J. Melody, Richard
Ellis International and Hillier Parker May & Rowden during the 1990s and, in
2003, we acquired Insignia. Today, we believe we offer the commercial real
estate services industry's most complete suite of service offerings and that we
have a leadership position in many of the top business centers around the world.
Our primary business objective is to leverage this platform in order to garner
an increasing share of industry revenues relative to our competitors. We believe
this will enable us to maximize and sustain our long-term cash flow and increase
long-term stockholder value. Our strategy to achieve these business objectives
consists of several elements:
Increase Revenue from Large Clients. We plan to capitalize on our
client management strategy for our large clients, which is designed to
provide them with a full range of services globally while maximizing
our revenue per client. We deliver these services through relationship
management teams that are charged with thoroughly understanding our
customer's business and real estate strategies and matching our
services to the customers' requirements. The global relationship
manager is a highly seasoned professional who is focused on maximizing
revenue per client and compensated with a salary and a
performance-based bonus and is supported by salaried professionals with
specialized expertise, such as marketing, financial analysis and
construction. The team leader also taps into our field-level
transaction professionals, as necessary, for execution of client
strategies. We believe this approach to client management will lead to
stronger client relationships and enable us to maximize cross-selling
opportunities and capture a larger share of our clients' commercial
real estate services expenditures. For example:
we generated repeat business in 2003 from approximately 60% of our
U.S. real estate sales and leasing clients;
more than 40% of our corporate services clients today purchase
more than one service and, in many cases, more than two;
the square footage we manage for our 15 largest asset services
clients has grown by 55% in three years; and
the 50 largest clients of the investment sales group within our
real estate services line of business generated $52.6 million in
revenues in 2003-up 38.6% from $37.9 million for these same 50
clients four years earlier.
Capitalize on Cross-selling Opportunities. Because we believe
cross-selling represents a large growth opportunity within the commercial
real estate services industry, we are committed to emphasizing this
opportunity across all of our clients, services and regions. We have
dedicated substantial resources and implemented several management
initiatives to better enable our workforce to capitalize on these
opportunities among our various lines of business, including our "CBRE
University" outside Chicago that provides intensive training for sales and
management professionals, a customer relationship management database and
sales management principles and incentives designed to improve individual
productivity. We believe the combination of these initiatives will enable
us to further penetrate local markets and better capitalize on our
worldwide platform.
Continue to Grow our Investment Management Business. Our growing
investment management business provides us with an attractive revenue
source through fees on assets under management and gains on the sales
of assets. We also expect to achieve strong growth in this business by
continuing to harness the vast resources of the entire CB Richard Ellis
organization for the benefit of our investment management clients. CBRE
Investors' independent structure creates an alignment of interests with
its investors, while permitting its portfolio companies to use the
broad range of services provided by our other business lines. As a
result, we historically have received significant revenue from the
provision of services on an arm's length basis to these portfolio
companies, and we believe this will continue in the future.
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Focus on Best Practices to Improve Operating Efficiency. In 2001, we
launched a best practices initiative, branded "People, Platform &
Performance," and we believe the process and operational improvements
associated with this initiative contributed to operating cost
reductions. We believe our focus on best practices has enabled us to
generate industry-leading operating margins. We remain keenly focused
on this strategic initiative and continue to strive for efficiency
improvements and cost savings in order to maximize our operating
margins and cash flow.
Competition
We compete across a variety of business disciplines within the commercial real
estate services industry, including investment management, tenant
representation, corporate services, construction and development management,
property management, agency leasing, valuation and mortgage banking. Each of the
business disciplines in which we compete is highly competitive on an
international, national, regional and local level. Although we are the largest
commercial real estate services firm in the world in terms of 2003 revenue, our
relative competitive position varies significantly across product and service
categories and geographic areas. Depending on the product or service, we face
competition from other commercial real estate service providers, institutional
lenders, insurance companies, investment banking firms, investment managers and
accounting firms, some of which may have greater financial resources than we do.
Many of our competitors are local or regional firms. Although substantially
smaller than we are, some of these competitors are larger on a local or regional
basis. We are also subject to competition from other large national and
multi-national firms that have similar service competencies to ours, including
Cushman & Wakefield, Grubb & Ellis, Jones Lang LaSalle and Trammell Crow.
Different factors weigh heavily in the competition for clients. In advisory
services, key differentiating factors include quality service, resource depth,
demonstrated track record, analytical skills, market knowledge, strategic
thinking and creative problem-solving. These factors are also vital in
outsourcing services, and are supplemented by consistency of execution across
markets, economies of scale, enhanced efficiency and cost reduction strategies.
In investment management the ability to enhance asset value and produce solid,
consistent returns on invested capital are keys to success.
Seasonality
A significant portion of our revenue is seasonal. Historically, this seasonality
has caused our revenue, operating income, net income and cash flow from
operating activities to be lower in the first two calendar quarters and higher
in the third and fourth calendar quarters of each year. The concentration of
earnings and cash flow in the fourth quarter is due to an industry-wide focus on
completing transactions by year-end.
Employees
At December 31, 2003, we had approximately 13,500 employees worldwide. At
December 31, 2003, approximately 245 of our employees were subject to collective
bargaining agreements, the substantial majority of whom are employees in our
asset services business in the New York/New Jersey area. We believe that our
relations with our employees are satisfactory.
Intellectual Property
We hold various trademarks and trade names worldwide, which include the "CB
Richard Ellis" name. Although we believe our intellectual property plays a role
in maintaining our competitive position in a number of the markets that we
serve, we do not believe we would be materially adversely affected by expiration
or termination of our trademarks or trade names or the loss of any of our other
intellectual property rights other than the "CB Richard Ellis" name and the
"L.J. Melody" name. With respect to the CB Richard Ellis and L.J. Melody names,
we have processed and continuously maintain trademark registrations for these
trade names in the United
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States and, solely with respect to the CB Richard Ellis name, in most foreign
jurisdictions where we conduct significant business. We obtained our most recent
U.S. trademark registrations for the CB Richard Ellis name and related trade
names in 2001, and these registrations would expire in 2007 if we failed to
renew them. We obtained our most recent U.S. trademark registration for the L.J.
Melody name in 1997, and this registration would expire in 2007 if we failed to
renew it.
In addition to trade names, we have developed proprietary technology for
preparing and developing valuation reports to our clients through our valuation
business and we offer proprietary research to clients through our Torto Wheaton
research unit. We also offer proprietary investment structures through CB
Richard Ellis Investors. While we seek to secure our rights under applicable
intellectual property protection laws in these and any other proprietary assets
that we use in our business, we do not believe any of these other items of
intellectual property are material to our business.
Environmental Matters
Federal, state and local laws and regulations impose environmental controls,
disclosure rules and zoning restrictions that impact the management,
development, use, or sale of commercial real estate. We are not aware of any
material noncompliance with the environmental laws or regulations currently
applicable to us, and we are not the subject of any material claim for liability
with respect to contamination at any location. However, these laws and
regulations may discourage sales and leasing activities and mortgage lending
with respect to some properties, which may adversely affect both us and the
commercial real estate services industry in general. In addition, if we fail to
disclose environmental issues in connection with a real estate transaction, we
may become liable to a buyer or lessee of property. Environmental contamination
or other environmental liabilities may also negatively affect the value of
commercial real estate assets held by entities that are managed by our
investment management business, which could adversely impact the result of
operations of that business line.
Applicable laws and contractual obligations to property owners could also
subject us to environmental liabilities through our provision of management
services. Environmental laws and regulations impose liability on current or
previous real property owners or operators for the cost of investigating,
cleaning up or removing contamination caused by hazardous or toxic substances at
the property. As a result, we may be held liable as an operator for such costs
in our role as an on-site property manager. This liability may result even if
the original actions were legal and we had no knowledge of, or were not
responsible for, the presence of the hazardous or toxic substances. Under
certain environmental laws, we could also be held responsible for the entire
amount of the liability if other responsible parties are unable to pay. We may
also be liable under common law to third parties for property damages and
personal injuries resulting from environmental contamination at our sites,
including the presence of asbestos-containing materials. Insurance coverage for
such matters may be unavailable or inadequate to cover our liabilities.
Additionally, liabilities incurred to comply with more stringent future
environmental requirements could adversely affect any or all of our lines of
business.
Facilities
We occupied the following offices as of December 31, 2003:
Sales Corporate
Location Offices Offices Total
The Americas 139 2 141
Europe, Middle East and Africa 52 1 53
Asia Pacific 25 1 26
Total 216 4 220
In general, these leased offices are fully utilized. The most significant terms
of the leasing arrangements for our offices are the term of the lease and the
rent. Our leases have terms varying in duration. The rent payable
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under our office leases varies significantly from location to location as a
result of differences in prevailing commercial real estate rates in different
geographic locations. Our management believes that no single office lease is
material to our business, results of operations or financial condition. In
addition, we believe there is adequate alternative office space available at
acceptable rental rates to meet our needs, although adverse movements in rental
rates in some markets may negatively affect our profits in those markets when we
enter into new leases.
We do not own any offices, which is consistent with our strategy to lease
instead of own.
Legal Proceedings
We are party to a number of pending or threatened lawsuits arising out of, or
incident to, our ordinary course of business. Our management believes that any
liability imposed on us that may result from disposition of these lawsuits will
not have a material effect on our consolidated financial position or results of
operations.
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